### The after tax cost of debt and before tax cost of debt

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##### Reference no: EM131338805

Use the following information to answer the next five questions (assume Co. tax rate of 35%):

Debt - 50,000 bonds with 7.5 percent coupon rate, \$1,000 par value, 20 years to maturity, selling for 96.3 percent of par; the bonds make annual coupon payments

Common Stock - 1,000,000 shares of common stock outstanding. The stock sells for a price of \$50 per share and has a beta of 1.08

Preferred Stock - 150,000 shares of preferred stock outstanding, currently selling for \$110 per share; with annual dividend payment of \$8.00

Market - 10 percent market risk premium and 4 percent risk free rate

1) The before tax cost of debt is:

a) 7.50%

b) \$5,055,750

c) \$5,305,167

d) 7.87%

2) The after tax cost of debt is:

a) 4.88%

b) \$51.20

c) 5.12%

d) \$50.00

3) The company’s cost of common stock is:

a) 14.80%

b) 9.40%

c) \$50.00

d) 2.08%

4) The company’s cost of preferred stock is:

a) \$110.00

b) 7.27%

c) 13.72%

d) 7.96%

5) The WACC of the company is:

a) 10.03%

b) 8.68%

c) 9.65%

d) 11.72%

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